TNAG-0456-FCO40-521-Reports-and-accounts-of-Exchange-Fund-of-Hong-Kong-1974 — Page 12

to the Banks.

5. The Exchange Fund has in effect been acting to some extent

like a Central Bank, ie. defending a rate of exchange, and has

felt obliged to compensate banks for the embarrassment this depar-

ture from the traditional system has inevitably caused. This in

turn has compromised the traditional basis on which the "automatic"

system works. A good banker would obviously be worried by the

fact that his assets do not meet his liabilities in the context of

one currency transferable into another at a fixed rate on demand.

I think the risk is probably exaggerated and that the Hongkong

Government would not experience difficulty in raising an external

loan to meet the deficit if need arose.

6.

However Hongkong probably cannot continue to "have it both

ways" on the currency front. Has not the time come to move to some sort of "Monetary Authority" (on Bahamas lines)? This could

mean, amongst other things, some economy in the holding of

external reserves. But perhaps the peculiar political circumstances

of Hongkong preclude such a development?

22 July 1974

M. Maccoll

(Mrs) M Maccoll

DTEU